REGULATING NON-BANKING

This role is, perhaps, the most unheralded aspect of our activities, yet it remains
among the most critical. This includes ensuring credit availability to the productive
sectors of the economy, establishing institutions designed to build the country’s
financial infrastructure, expanding access to affordable financial services and
promoting financial education and literacy.

India has financial institutions which are not banks but which accept deposits and extend credit like banks. These are called Non-Banking Financial Companies (NBFCs) in India.

NBFCs in India include not just the finance companies that the general public is largely familiar with; the term also entails wider group of companies that are engaged in investment business, insurance, chit fund, nidhi, merchant banking, stock broking, alternative investments, etc., as their principal business. All are though not under the regulatory purview of the Reserve Bank.

At end-March 2017, there were 11,522 NBFCs registered with the Reserve Bank, of which 178 were NBFCs-D and 220 were NBFCs-ND-SI. The share of NBFCs in terms of assets in total financial sector is 8.3 per cent as on 2016-17

Bringing diversity in financial sector

Being financial intermediaries, NBFCs are engaged in the activity
of bringing the saving and the investing community together. In this role they are
perceived to be playing a complimentary role to banks rather than competitors, as
majority population in the country does not yet have access to mainstream financial
products and services including a bank account. NBFCs especially NBFC-MFIs (Micro
Finance Institutions) and Asset Finance Companies thus have a complimentary role
in the financial inclusion agenda of the country.

Further, some of the big NBFCs, namely, infrastructure finance companies
or those in factoring business, give fillip to the growth and development of the
important sectors, like infrastructure. NBFCs have carved niche business areas for
themselves within the financial sector space and are popular for providing customised
products like second hand vehicle financing, mostly at the doorstep of the customer.
In short, NBFCs bring the much needed diversity to the financial sector thereby
diversifying the risks, increasing liquidity in the markets thereby promoting financial
stability and bringing efficiency to the financial sector.

Regulating NBFCs

In the wake of failure of several banks in the late 1950s and early
1960s in India, large number of ordinary depositors lost their money. At this time,
the Reserve Bank did note that there were deposit taking activities undertaken by
non-banking companies. Though they were not systemically as important as the banks,
the Reserve Bank initiated regulating them, as they had the potential to cause pain
to their depositors. These institutions have thus been under the regulatory oversight
of the Reserve Bank of India since 1963. Since then regulation has generally kept
pace with the dynamism displayed by the sector. Later in 1996, in the wake of the
failure of a big NBFC, the Reserve Bank tightened the regulatory structure over
the NBFCs, with rigorous registration requirements, enhanced reporting and supervision.
The Reserve Bank also decided that no additional NBFC will be permitted to raise
deposits from the public. Further, in 1999 capital requirement for fresh registration
was enhanced from `25 lakh to `200 lakh. Later when the NBFCs sourced their funding
heavily from the banking system, it raised systemic risk issues. At the same time,
their growing size and interconnectedness also raise concerns on financial stability.
Sensing this, the Reserve Bank brought asset side prudential regulations onto the
NBFCs. The Reserve Bank’s endeavour has been to streamline NBFC regulation, address
the risks posed by them to financial stability, address depositors’ and customers’
interests, address regulatory arbitrage and help the sector grow in a healthy and
efficient manner.

Some of the regulatory measures include identifying systemically important
non-deposit taking NBFCs as those with asset size of ‘100 crore and above in the
year 2006 and bringing them under stricter prudential norms (CRAR and exposure norms),
issuing guidelines on Fair Practices Code, aligning the guidelines on restructuring
and securitisation with that of banks, permitting NBFCs-ND-SI to issue perpetual
debt instruments etc. Recently, in November 2014, the entire regulatory framework
was reviewed with a view to transitioning, over time, to an activity based regulation
of NBFCs. As a first step in this direction, certain changes to the regulatory framework
are sought to be made to a) address risks wherever they exist, b) address regulatory
gaps and arbitrage arising from differential regulations, both within the sector
as well as vis-a-vis other financial institutions, c) harmonise and simplify regulations
to facilitate a smoother compliance culture among NBFCs, and d) strengthen governance
standards. Threshold for systemic significance has been redefined as Rs. 500 crore
from the extant Rs. 100 crore in assets. Systemically important NBFCs along with
deposit taking NBFCs would be subject to inter alia, higher minimum Tier 1 capital,
higher corporate governance standards and also stricter asset classification norms.

The challenges

The challenge for the NBFC sector is to grow in a prudential manner
while not stopping altogether on financial innovations. The key lies in having in
place adequate risk management systems and procedures before entering into risky
areas.

It is the constant endeavour of the Reserve Bank to enable prudential growth of
the sector, keeping in view the multiple objectives of financial stability, consumer
and depositor protection, and need for more players in the financial market, addressing
regulatory arbitrage concerns while not forgetting the uniqueness of the NBFC sector.

Legal Framework

It is the constant endeavour of the Reserve Bank to enable prudential growth of
the sector, keeping in view the multiple objectives of financial stability, consumer
and depositor protection, and need for more players in the financial market, addressing
regulatory arbitrage concerns while not forgetting the uniqueness of the NBFC sector.
The Reserve Bank is, at present, reviewing the regulatory framework for NBFCs.

Follow RBI

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.